AUD/USD Price Forecast: Why is RBA’s dovish hike weighing on the Australian Dollar?

• AUD/USD falls steeply, with the Australian Dollar under heavy pressure following the RBA’s dovish rate hike.
• RBA guidance indicated that the threshold for a further interest rate increase remains high.
• The results of the US midterm elections are expected to have a short-lived impact that weighs on the US Dollar.

Selling pressure leaves the Australian Dollar (AUD) lagging its major currency peers on Tuesday. During European trading, it is down 0.45% against the US Dollar (USD), at around 0.6965.

Behind the Australian currency’s sharp weakness is the Reserve Bank of Australia’s (RBA) apparent reluctance to raise borrowing costs further. Earlier in the day, the central bank increased the Official Cash Rate (OCR) by 25 basis points (bps) to 4.85%.

Why is the Aussie falling despite the RBA hike as dovish signals and a weaker outlook weigh?

Describing the reaction to the decision, ING analysts say the Aussie Dollar “came under pressure this morning after the RBA hiked rates as expected to 4.85%, but delivered some dovish signals.” The bank points out that “the 6-3 split suggests lower conviction around today’s decision than in markets, which had almost fully priced in a hike (21bp),” indicating that the policy stance was less forceful than investors had expected.

Another change, according to ING, was that “the statement dropped its reference to potential further hikes for the first time since June,” while “the economic outlook was revised sharply to the downside, with a focus on falling house prices weighing on consumers and upside risks to unemployment.” Governor Michele Bullock, speaking at the press conference, “reinforced the RBA’s wait-and-see approach, stressing that monetary tightening still has to feed through to the economy.”

On the scope for additional action, ING observes that “she left the door open to further tightening, but the bar is clearly higher now,” describing the RBA as appearing “happy to assess the impact of previous hikes before acting again.” The bank concludes: “This is in line with our forecast of no further RBA hikes,”

Attention now turns to September’s Trade Balance figures, due on Thursday, as the next major catalyst for the Australian Dollar.

Caution also characterises US Dollar trading as investors await the United States (US) midterm elections in the late North American session.

Assessing the potential currency impact, ING strategists say that “we don’t expect today’s US midterm results to cause structural shifts in FX, but the Dollar may face some short-term pressure should the Democrats secure both the House (widely expected) and the Senate (close call).”

Under their base case, “markets fully price in a Republican loss of the House, but only partially a Democratic clean sweep,” leaving scope for the outcome described in their assessment that “a blue sweep can put some pressure on the Dollar.”

Among the risks, ING highlights that “fears of tougher regulation could weigh on AI stocks (we’ve recently seen how that can hit the greenback), while markets could price in greater risks of decision-making gridlock around issues such as government funding and the debt ceiling.” Nevertheless, the strategists maintain that “we doubt that’s enough to trigger a structural directional shift in the Dollar. The greenback continues to respond predominantly to the Fed story, which shouldn’t face an immediate and direct impact from the midterm result. We expect a split Congress (R-S, D-H) to have a neutral or slightly positive USD impact.”

AUD/USD Technical Analysis: Can the Pair Ease Bearish Pressure?

A bearish near-term outlook persists on the daily chart, where AUD/USD stands at 0.6967, below its 20-day Exponential Moving Average (EMA) of 0.7008. With the Relative Strength Index (RSI) around 42, downside momentum appears modest rather than indicative of outright oversold conditions.

The former breakout area around 0.6904 provides the first downside support, followed by the structural trend-line base near 0.6834. For any recovery, the initial hurdle is the 20-day EMA at 0.7008. Only a sustained break above that level would alleviate bearish pressure and pave the way for a more constructive rebound.

(The technical analysis of this story was written with the help of an AI tool. Know more.)